Measuring Brazil’s Wealth: Physical, Human, and Natural Resources

When we look at a country’s level of economic development, the first number we tend to focus on is the Gross Domestic Product (GDP). The total sum of a country’s yearly production of goods and services, GDP figures and growth rates offer key insights into an economy’s overall size, its level of economic dynamism, and the wealth of its population. Yet, as most students learn in Economics 101, GDP numbers cannot in themselves tell the story of a society’s development because they do not take into account crucial factors such as inequality, political structure, quality of life, or pollution levels. To truly understand any economy, we need to look at a variety of economic indicators.

Concepts of Capital and the “Inclusive Wealth Index”

One of the most important figures to consider when measuring wealth is capital formation. Traditional development theory suggests that measurements of gross capital formation are key to understanding a country’s economic trajectory, as they give an idea of much of its resources the country is devoting to investments that will improve productivity and enable business activity to expand. Mathematical formulas such as the Harrod-Domar Model essentially tried to establish simple rules to explain the development process in these terms: the more capital a country accumulates, the more developed it becomes. I have mentioned this briefly in previous posts, comparing ratios of capital per worker in Brazil, India and China as an important gauge of each country’s future potential.

Yet measurements of capital formation also tend to have a fatal flaw: they focus on a very narrow definition of what constitutes “capital”. These measurements normally refer to physical capital: the tools, machinery and infrastructure we use in our daily lives to make each individual worker more productive. To be sure, physical capital is vitally important. It would take a group of construction workers much longer to build a house if they had no saws, trucks, cranes or drills. In my daily life here in Brazil, I see the significant difference in physical capital accumulation in comparison with the U.S., where state-of-the-art equipment allows for much greater efficiency in various activities, thus enabling us to generate more wealth per person.

But physical capital is not the only factor that determines the productivity of a given set of workers. In its new “Inclusive Wealth Index”, the U.N. has determined that a country’s productive base is made up of physical capital, human capital (ability of the workers themselves) and natural capital (resources such as land, oil and gas, water and minerals). There is also a lingering academic debate about whether to include financial capital, the ability of a country’s financial sector to channel investment and savings into productivity-improving activities, but for the purposes of this column I will put that consideration aside.

To understand Brazil’s future, it is therefore key to understand its formation of physical, human and natural capital. I will go through these three items in turn.

Physical Capital

As I mentioned in my recent post on infrastructure, Brazil’s physical capital accumulation has stalled over the last three decades. In addition to not investing enough in its roads, trains, ports and airports, Brazil has not been accumulating enough machinery and equipment to make its economy more productive. Improving infrastructure has become a top priority for the government, but it remains to be seen how much effect new reforms and spending programs will have in this area. In order to increase physical capital more generally, it will be necessary for Brazil to do a better job in promoting savings and investment as well as enacting liberalizing reforms. This must be a top priority for Ms. Rousseff if she is serious about fulfilling her promise to tackle Brazil’s lingering competitiveness problems.

Human Capital

Brazil has done a better job over the last thirty years of improving its human capital stock. A traditionally nebulous term, human capital has gained ground in recent years as a useful way of understanding the differences in productivity among groups of workers with the same physical resources at their disposal. This, of course, depends on many factors, such as how healthy the workers are, their level of educational attainment, what skillsets they possess, and what norms and behaviors guide their ability to work together as a group.

Progress on education and health care are easier to measure through statistics and are normally the two go-to concepts people think about when they think of human capital. Brazil has made much progress on these fronts, though more certainly needs to be done moving forward.

While the country has made significant strides in universalizing education and developing internationally-recognized flagship universities, its public education system still remains weak overall, especially in comparison to East Asian tigers such as China and South Korea. Overall test scores have shown signs of progress in recent years, and the government is working on a new “National Education Plan” to be finalized in 2014 that should increase investment in equipment, infrastructure and salaries, help to create a national standardized curriculum and promote experimentation with streamlining management, improving teacher training and evaluation, and lengthening the school day. As in the U.S., many issues of education reform are quite polemical and there are heated debates regarding merit pay, “teaching to the test” and the importance of poverty as a performance indicator. Also similar to the U.S., much experimentation has gone on so far at the local level, and recent reforms in the Rio municipal school district have shown promise. Like Americans, Brazilians are very aware of the failures of their public education system and the importance of tackling this problem in order to improve the country’s global competitiveness.

Health care has also improved greatly over the last few decades, thanks in large part to the expanding reach of the country’s public health care system, known as SUS. Considered a pioneer in Latin America, SUS offers free medical care to all comers and has greatly expanded access to health care for Brazil’s poor. The country's successful response to the AIDS crisis has often been toted as a model for the developing world. Yet SUS has come under heavy criticism in recent years for its inability to provide quality care. The upper and middle classes prefer to seek treatment in private facilities, and private care as a percentage of health care spending is even higher in Brazil than in the U.S., which does not even have a universal public health care program. And as a tropical country, Brazil faces some particularly difficult health care challenges as it seeks to rein in diseases such as malaria and dengue. Health care is a heated discussion topic in the ongoing municipal election campaigns, and there is no doubt that expanding and strengthening the government’s public health programs will be pivotal in improving the country’s human capital.

Aside from education and health care, other forms of human capital are not as easy to quantify and analyze. These have to do with the rules and norms governing interactions among citizens. Part of this has to do with developing strong institutions that contribute to a country’s long-term economic dynamism. I have written previously about several forms of institutional development, such as promoting political stability and pluralistic democracy, reducing corruption, enhancing  interpersonal trust, and increasing mechanisms for project planning and execution. I will write in the future about other institutional issues such as reshaping cultural norms and promoting an independent, efficient judiciary to strengthen the rule of law. Institution building along these lines is the hardest development to track in quantitative terms, but I believe that it is where Brazil has made the most drastic progress over the last few decades and will continue to improve in the future. While such gains may not fit neatly onto a simple chart comparing countries’ economic development, they represent an absolutely pivotal part of the human capital formation process. By strengthening society’s norms and interactions, we strengthen the ability of our workforce to cooperate in productive endeavors, thus accelerating the process of economic development. 

Natural Capital

Natural capital may be the easiest of the three concepts to understand, as it generally refers to a country’s natural resources. Some of these resources may be extracted for one-time use and are thus diminished over time, such as oil and gas reserves or mineral deposits. Others can replenish themselves if cared for properly, such as water, land, and forest resources.

Knowing how to manage one’s natural resources is thus a crucial element for a country to build its capital base. In this case, accumulating physical capital (tools) and human capital (know-how) is sometimes necessary in order to utilize one’s natural capital. Good examples of this are Brazil’s large offshore oil projects, mountain mining initiatives, hydroelectric dam structures, and agricultural development programs, which have all required high amounts of investment and technical expertise. Having developed strong specialties in these areas, Brazil has been able to take advantage of its huge natural resources to develop a competitive economy in the commodities sector.

Brazil’s other challenge in this regard is to make reductions in natural capital sustainable. This means not only protecting reusable resources to prevent irreversible environmental damage (as I discuss in a previous post on sustainable development), but also offsetting reductions in natural capital with increases in other forms of capital accumulation. The U.N. Inclusive Wealth Report indicates that an economy can be considered sustainable if a drop in natural capital is balanced out by an increase in physical or human capital. An example of this would be Brazil using its new oil revenues to invest in infrastructure and public education. If such investments are not made, however, then the country can end up wasting its natural resources windfall. The U.N. report indicates that Brazil’s trajectory over the last decade has indeed been sustainable, as a drop in natural capital was more than offset by an increase in human capital formation. But Brazilians should not be complacent on this front, especially as the profits from the coming oil boom will no doubt become a major temptation for greedy politicians.

A more complete look at Brazil’s process of capital accumulation shows that the country has many chances ahead to improve productivity in a variety of ways and accelerate its development process. Investments in infrastructure, machinery and equipment, education, health care, institutional development and natural resource extraction and conservation will all be crucial for increasing wealth and solidifying the gains of the last few decades. These are the keys to improving Brazil’s competitiveness in the 21^st century global economy.

Breaking the Vicious Cycle: Crime and Trust in Latin America

When foreigners visit Brazil, one of the first things they tend to notice is the heavy security presence everywhere they go. Houses and apartment buildings are hidden behind high walls and electric fences, private guards stand at the entrances to stores and shopping malls, and cameras everywhere remind passers-by that they are constantly being filmed. Visitors also quickly become aware of how cautious local residents tend to be in their daily lives, whether it involves going out on the street, leaving doors unlocked, or stopping a car at a red light.

For those unaccustomed to this world, it can be a difficult reality to adjust to. In many ways, it makes Brazil feel unwelcoming and reinforces the perception that this is a society rigidly divided along class lines, where interaction between groups is fairly limited. It is easy to feel trapped in a bubble, moving from gated sanctuary to gated sanctuary, unable to wander freely and securely. Whereas in the U.S. it is common for people to spend time playing in their yards and many scoff at the us-versus-them “Gated Community Mentality”, in Brazil it is accepted as fact that any worthwhile property will need a heavy layer of protection in order to be livable.

Yet, after spending more time in this country, it becomes much easier to understand the “bunker mentality” of many Brazilians. Simply put, these communities are very dangerous. I have heard enough personal accounts of armed break-ins, kidnappings, and car thefts to understand that the intense security truly is necessary for people to feel safe. Violent crime in Brazil has long been legendary; tourists in Rio are constantly advised to remain on guard against kidnapping, carjacking, and armed robbery. The past few decades have seen the problem become more acute: the national homicide rate has jumped from 11.7 murders per 100,000 people in 1980 to 26.2 in 2010, putting it on par with infamously chaotic Somalia.

Aside from creating the need for a ubiquitous security presence, Brazil’s crime problem has an even more pernicious effect on society: the erosion of interpersonal trust. Because of the need to constantly be on guard against potential threats, Brazilians are trained instinctively to be distrustful of strangers. This effect has been studied closely through so-called international “trust surveys” where respondents are asked whether, in general, it is ok to confide in others or whether it is better to be more cautious. Brazil consistently comes out toward the bottom of these rankings, as shown by this “World Map of Interpersonal Trust”:

It should be pointed out that Brazil is not alone in this regard. The Latin America region overall is known for high crime rates and low levels of interpersonal trust, measured annually in the Latinobarometro surveys. While Brazil may be the most extreme example of this issue, the trust deficit is also widening in countries like Mexico that are bogged down in endless drug wars that have led to spikes in violence. Even Chile, considered the most stable and prosperous of Latin American nations, compares unfavorably to the OECD countries on this important indicator.

While the importance of interpersonal trust may seem somewhat nebulous, it should not be overlooked. Latin America is still undergoing a period of democratic consolidation, and institution-building is an essential priority to creating open, inclusive societies with dynamic economies. When people do not trust each other, it becomes more difficult to build efficient legal systems and bureaucracies and there are more barriers to promoting economic interactions. Societies become less cohesive and participatory and people separate themselves more and more into isolated enclaves. Any attempts to create pluralistic democracies will be undermined if a country is plagued by a persistent trust deficit.

When looking for factors to explain Latin America’s crime and trust problems, many people tend to point out inequality. Countries with high rates of inequality, such as Brazil, tend to have high crime rates and low levels of interpersonal trust, whereas more equal countries such as Norway and Sweden tend to have the lowest crime rates and the highest levels of trust. As the most unequal region in the world, it should come as no surprise that Latin America has the highest trust deficit as well. Unequal societies are a natural breeding ground for crime because they create supply (material wealth concentrated in the hands of a few) as well as demand (poor people with either resentment of the rich or the desire to imitate the lavish lifestyles they witness daily).

But the other closely-related factor that is sometimes overlooked is in many ways more direct: the presence of “law-and-order” institutions. While inequality may sow the conditions for crime, it is a breakdown in policing structures that makes it viable. Often, therefore, violent crime tends to spike in periods of transition between established orders. Recent research has noted that Brazil’s upswing in crime came about during the fall of the military dictatorship and the transition to democracy. A similar phenomenon was observed during the collapse of apartheid in South Africa and, so far, the Mubarak regime in Egypt. These examples underscore a point that often is not recognized in discussions about crime: transitions from dictatorship to democracy are often accompanied by waves of violence that erode societal trust and create barriers to forming new, inclusive institutions. Indonesia, another country that recorded low levels of interpersonal trust on the map above, is still going through a democratic consolidation process that began in 1998 and has seen sporadic outbreaks of violence and secessionist movements. While traveling in China in 2008, I was struck by how safe I felt wherever I went; the country’s highly fortified police presence, while meant primarily to quell domestic unrest, made it easier to feel relaxed and secure. In a chaotic transition period, it is easy to imagine how a sudden power vacuum can lead to a surge in crime.

In Brazil, the surge in the murder rate occurred during the transitional decades of the 1980s and 1990s, when the nation was working to consolidate a new democratic regime. The murder rate has dropped slightly since 2003, though it remains much higher than pre-1980 levels:

This suggests that the worst may have passed, and that steady improvements in policing and reductions in inequality could slowly enable the country to overcome its violent past. It is, of course, an incredibly complex challenge to break the cycle between low interpersonal trust, high crime rates, and high inequality. There are no quick fixes and simple solutions. But success stories indicate that progress is indeed possible. Much has been made of the fall in crime rates in the U.S. and the numerous attempts to identify the key factors. Brazil’s Southeast region has seen a similarly stunning decline, with the homicide rate falling by 48.6% in Rio and 67.0% in São Paulo between 2000 and 2010. (Unfortunately, this was somewhat negated on a national level by spikes in violent crimes in the North and Northeast.) As in the U.S., no single analysis has emerged to clarify the underlying causes. At the very least, the figures provide reason for optimism that Brazil can ultimately turn the corner on this issue.

The next few decades will be a crucial test for Brazil to address this lingering problem. It is a shame that people here constantly have to walk around with their guard up and feel that living in gated communities is the only way to have a house with a yard and a social environment where people can interact openly with their neighbors. If the nation can finally bring violent crime under control and create an environment where citizens feel relatively safe out on the streets and in their houses, it may help to solidify interpersonal trust and reduce the need for omnipresent heavy security apparatuses. For a nation that prides itself on being warm and receptive to outsiders, that would be a truly welcome change.

Building 21st Century Cities: Urban Development in Brazil

One of the most important phenomena transforming the world economy in the 21^st century is the urbanization of emerging market countries. Whereas industrialized nations in North America, Europe and East Asia underwent a broad transition to urban life during the 1900s, most people in the rest of the world continued to reside in rural areas, working mostly as farmers. I have written previously about the importance of urbanization to economic development. In essence, urbanization is the most radical change to occur in human society since we shifted from migrant hunters and gatherers to stationary farmers many millennia ago. It enables economies to shift from subsistence agriculture to higher-productivity manufacturing and service activities, which allows for more specialization and, therefore, a more diverse array of work opportunities that leads to greater wealth creation. The overall trend line toward urbanization is very clear, as this chart illustrates:

This second chart also illustrates how major emerging markets are still catching up to the West, with middle-income countries such as Brazil already well along in the process:

How emerging markets handle this urbanization process will go a long way toward determining the structure of the global economy. Building efficient, productive cities that provide necessary public services and a high quality of life will be the key to unlocking the potential of the world’s low- and  middle-income nations.

Nowhere is the need for effective urban planning clearer than in Latin America. The region is already the most urbanized in the world, with 80% of residents living in cities. (This number is expected to grow to 90% by 2050, slightly ahead of the U.S. and Europe, as the previous graphic illustrates.) Latin America has long been famous for its poorly-organized megacities such as Santiago, Mexico City and São Paulo: chaotic, congested urban areas known for a high prevalence of dangerous crime, environmental degradation, and sprawling shantytowns. Latin America experienced its urban boom in decades when public administration was weak and local governments were ill-equipped to deal with the influx of new residents. Municipal planners have been forced to play catch-up ever since. Changing Latin America’s historical path of urban development is a vital task in the region’s quest to converge with the living standards of the West.

As the most prominent and populous country in Latin America, it is no surprise that Brazil is home to the greatest number of urban centers in the region. The McKinsey Global Institute recently published a study highlighting the “Emerging 440” cities in the developing world that are expected to generate nearly half of global growth in the 21^st century. Of the 54 Latin American cities to make the list, 27 are in Brazil. In addition to its 25 “middleweight” cities such as Goiania, Manaus and Porto Alegre, Brazil is also home to 2 of the world’s 27 megacities, São Paulo and Rio de Janeiro. (Latin America has 2 other megacities, Mexico City and Buenos Aires.) Outside of McKinsey’s “Emerging 440”, with its emphasis on large cities, Brazil is also developing many smaller regional cities. In my state of Minas Gerais, for example, Belo Horizonte is the main city located in the center, but there are other growing urban areas such as Governador Valadares in the East, Montes Claros in the North, Juiz de Fora in the South, and Uberlândia in the West. With its sizeable number of large, medium and small cities dispersed across the country, Brazil thus has a strong urban base to serve as the motor for the country’s economic development. The trick moving forward will be to create effective urban administration to unlock productivity gains and improve living standards.

Brazil’s Urban Challenges

Take a quick visit to any of Brazil’s major cities and the scope of the country’s problems becomes quickly evident. These urban areas tended to develop in a very chaotic fashion, with patchy public services such as electricity, clean water, waste collection and sewage treatment. Housing is clearly lacking, and many poorer residents have resorted to building makeshift slums on occupied territory, leading to the country’s infamous favela problem. Transport infrastructure is also lacking, leading to disorderly and confusing neighborhoods where narrow roads twist and turn without any clear overarching structure. There is little to no effort at urban zoning, meaning that residential houses, nightclubs, factories, stores, and other properties are all interspersed throughout the city in no coherent order, making the organization of the city that much more challenging.

While these issues have always been a problem for Brazil, they have become painfully acute in the last decade as a growing middle class upends traditional urban structures. As befits one of the most historically unequal countries in the world, Brazil’s cities have long been defined by the gap between the haves and the have-nots. The country’s glaring wealth gap has often shocked foreign visitors who have difficulty in adjusting to the jarring views of luxury apartments located next to sprawling favelas, as in the following picture:

Yet Brazil’s ongoing economic transformation is beginning to render such traditional depictions obsolete. While the country remains extremely unequal, it is increasingly becoming defined by its growing middle class, which just a few years ago became the majority of the country’s population. The growth of this consumer class has led to explosive demand for automobiles, housing and electricity. Brazil’s municipal governments are now under greater pressure than ever to provide quality roads and public transportation, build residential areas with access to clean water, energy, and sewage, and design effective public health, education, and policing systems. Whereas Brazil’s wealthy families have traditionally eschewed the government to pay for their own services and its poor families were accustomed to being ignored or mistreated, its emerging middle class has raised expectations for what local government can and should provide for its citizens.

One of Brazil’s greatest challenges to improved urban planning is the inherent difficulty involved in redesigning cities that are already highly populated. It is difficult to design new roads, communities and public transport when that would involve tearing down and rebuilding certain parts of urban centers. Whereas China has prepared large urban infrastructure projects in sparsely populated cities in expectation of future migration booms, Brazil is trying to accomplish the feat after, not before the fact. (China’s approach is not without its own problems, as many have criticized the country for an unsustainable building boom in ghost cities, creating a bubble that is sure to pop.) Therefore, in addition to the basic challenge of organizing its cities, Brazil faces the additional difficulty of having to integrate pre-existing communities into its design.

Integrating the Favelas

Nowhere is this challenge more apparent than in the favelas. Long the centers of urban violence and drug trafficking, Brazil’s favelas often operate as independent states where local authorities do not dare enter. This exacerbates crime issues and also makes life difficult for the slum residents who are often forced to live in fear. In order to change this situation, the Rio government has been implementing a favela pacification project as part of its World Cup and Olympic preparations. With help from the army, it has sent police pacification units into 26 local favelas near the city’s famous “South Zone”, along the beaches of Ipanema and Copacabana. The goal of the pacification units is to push out the drug traffickers and create space for the local government to move in and integrate the communities into the rest of the city. If successful, the pacification policy may end up being replicated in favelas across Brazil.

So far, there have been both positive and negative signs. Increased provision of public services shows that the communities are indeed becoming integrated into the city. The municipal electric utility has seen its number of clients explode, with 160,000 new individuals connected to the grid and delinquency rates falling from 59% to 10.6%. The government is also working to hand out property titles to favela residents in the occupied communities, thus validating their home ownership. Banks are beginning to install branches in the favelas, providing access to credit, and a new gondola in Complexo do Alemão has offered a new, innovative form of transportation for residents of the isolated, hilltop community. Perhaps most important of all, crime is on its way down, making the notoriously dangerous city significantly safer.

Yet not everything has gone smoothly. Conflicts between favela residents and police units have led to tension in the communities, and sporadic outbreaks of violence still occur. There are increasing worries over gentrification, as wealthier individuals move into the community and drive up prices, breaking up traditional social structures and forcing residents to the city’s periphery. There have been other complaints about more direct government bullying, as favela residents are pushed off their property to make room for new projects for the World Cup and Olympics. The pacification forces have also created a new problem: renegade police militias that take over the communities and repeat the violent, corrupt rule of their drug trafficking predecessors. Marcelo Freixo, a current candidate for mayor from the hard-left PSOL, built his political career on investigating and criticizing state and local government complicity in the city’s burgeoning militia problem and was profiled in the popular film "Elite Squad: The Enemy Within". The final drawback to the occupation policy is that, unsurprisingly, pushing the drug traffickers out of one region has simply made them pop up in other clandestine areas, further away from government control. Instead of solving the problem of urban crime and the drug trade, the pacification units simply relocate it.

Despite the drawbacks, the pacification policy seems to me to have been a major success. The remaining problems—police corruption, gentrification, drug-related crime—are fundamental issues of urban society that no country has been able to completely solve. The pacification policy was not designed to end crime or inequality, but rather to reduce it by providing the overall security cover to slowly integrate slum communities into the rest of the city. In this respect, it is clearly moving in the right direction. Violent crime is down, public service access is up, and the occupied favelas no longer operate as separate states-within-a-state. The real test of the policy will come after the Olympics when the pacification units withdraw, to see if the integration becomes self-sustainable. If so, one of Brazil’s urgent priorities will be to replicate it across the country. Occupying 26 favelas is a promising start, but it is just a drop in the bucket when one considers the hundreds of major slum communities still under control of the traffickers. Favela integration will be a long and difficult process.

Other Major Issues: Developing the Periphery, Sustainability, and Innovation

Although favelas may get all the international publicity, there are other integration problems facing Brazil’s major cities that are perhaps more important. Chief among these concerns is the integration of the periphery. While the country’s elite tend to live in luxury high-rises in the city centers, the growing middle class has been forced to look for affordable housing in less convenient areas further away from the center. Current transportation structures are designed on a “hub-and-spoke” model with all activity and transport flowing between the center and individual communities along its edges. This leads to huge amounts of congestion and inefficiency in terms of transportation. (This is a problem faced by urban planners all over the world.) New roads and public transportation systems will have to be designed that emphasize circular, ring-based patterns that allow for transit to flow in different directions and enable more interaction between communities on the periphery. To have an idea of what such design would entail, here are two contrasting pictures of the São Paulo metro (hub-and-spokes) and the Beijing metro (more circular design):

São Paulo Metro

Beijing Metro

A similar effort will be needed to build “beltway” ring roads that allow traffic to move circularly around the city as opposed to moving through the city center. Such systems are standard in the U.S., Europe and East Asia. This will greatly improve urban transit flows and reduce Brazil’s congestion problems. Once again, a comparison between the São Paulo city map and the Beijing city map is useful to understanding visually the different road structures of the two cities.

Another issue Brazil faces is its need for sustainability, particularly better environmental enforcement to improve urban air quality and limit pollution. I am often struck here by the low standards for truck emissions and the thick hazes of smog. Yet in this aspect, the country is moving in the right direction, albeit slowly. São Paulo now requires emissions checks for vehicles, a practice that should become more widespread and rigorous over time. More investment will need to be made, however, to upgrade truck fleets to more modern, low-emissions vehicles. There is strong public demand for more bike paths and metro systems, and the fact that these topics are increasingly becoming part of the national conversation shows Brazilians’ desire to switch to lower-polluting forms of transport. Also, as I have obviously mentioned many times before on this blog, Brazilian cities struggle with their waste management and low overall recycling rates. The main urban centers have also tended to neglect their rivers and inadequately treat their sewage, making waterways such as São Paulo's Tiete inhospitable and reducing opportunities for pleasant urban green space such as riverside parks. On a positive note, the country’s reliance on hydroelectric power means that power plant emissions remain quite clean, making air quality better than it would otherwise be. Overall, when it comes to the sustainability of Brazilian cities, there are both positives and negatives, and many challenges ahead. Like other countries across the world, Brazil has much work to do to make its cities greener, more livable, and more sustainable.

In addition to better planning and infrastructure, Brazil also needs to embrace innovation in its urban development process. The rising number of global cities offers opportunities for exciting local experimentation to solve issues faced in urban areas across the world. Rather than simply copying existing Western models of urban planning, Brazil should embrace new technology (especially digital IT systems), encourage individual cities to test new approaches, and promote the replication of successful pilot projects. Brazil has a good track record in this area. Perhaps the most famous example is Bus Rapid Transit (BRT), a system of high-speed bus lanes and stations that was pioneered in the southern city of Curitiba. BRT was so successful that it was eventually implemented in major cities such as Los Angeles, Beijing and Bogotá. Brazil is now working to install the system in 11 other major cities, including São Paulo and Rio. Another example is the IBM “Smarter City” command center recently installed in Rio, which serves as a focus point for coordinating the city’s crisis response and infrastructure systems. On a more personal note, Belo Horizonte’s inclusive waste management system that promotes the integration of catadores has also served as a model for similar efforts across the globe and is the reason I wound up in this city. These examples of experimental local projects highlight Brazil’s potential for innovative thinking and ability to pilot test new ideas in 21^st century urban development.  

Municipal Elections and the World Cup: A Country at a Crossroads

As Brazil gears up for a new round of municipal elections this October and the World Cup in 2014, urban development has become a hot topic of discussion. The Brazilian government portrayed its role as a host country as a chance for the nation to embark on a wave of modernization projects to bring its cities into a new era, making big investments to lay the foundation for major productivity gains and sustainable development. In many ways, this could be Brazil’s biggest chance to overcome its history of urban mismanagement and announce the country’s emergence on the world stage. And candidates from across the political spectrum are currently running across their cities, vying for the chance to be the leaders to turn this dream into a reality.

Construction has certainly been booming in preparation for the events, but progress has been slower than many had hoped for. Officials from FIFA (the international soccer federation) have gotten into public spats with their Brazilian counterparts, complaining about the lack of adequate preparation and repeated delays to projects. As many projects fall behind schedule, people are beginning to worry that the country is squandering its chances to finally overcome its urban development issues. And in some cities, particularly Rio, there are complaints that many projects have been poorly planned to meet the country’s real needs, and that instead of untangling congestion problems, they will end up as mere white elephants. While the national government may talk about increasing investment and innovation, in practice it has done little to reduce the nightmarish bureaucratic processes that lead inevitably to delays, cost overruns, and uneven planning. Even among its Latin American peers, Brazil’s implementation record remains weak. Whereas São Paulo and Mexico City started to construct their metros at the same time, São Paulo has only 71 km of lines, whereas Mexico City boasts more than 200 km. Improving upon this sort of weak track record will require a major overhaul in public administration. This is not something that can change overnight, even for an event as urgent as the World Cup.

Over the long run, however, Brazil’s chances still seem bright. The World Cup will result in major upgrades to local roads and airports (as well as the favela integration project) that will form important first steps for the country. And democratic pressure is increasingly holding local government officials responsible for providing results. Improving urban transport and public services is a nonstop complaint among local Brazilians, and is the first topic to appear in nearly all mayoral debates and television ads. Recent polling data shows that candidates’ voter support is very directly tied to the perceived effectiveness of the administration in office, meaning that the public is doing a relatively good job keeping track of the government’s performance and promoting accountability. The more that public pressure grows, the more that business-as-usual will become an unacceptable approach for government officials.

Urban development is never a sudden process. It is built slowly over time, developing more effective public administration to reduce corruption, invest in infrastructure, provide public services, integrate communities, promote sustainability, stimulate innovation, and enhance democratic accountability. Brazil is clearly making progress on these fronts, although major hurdles remain. It will be up to the country’s next crop of mayors to build productive, efficient cities that enhance the country’s economic activity and improve quality of life for its citizens. While much of the world’s focus may be on actions by the national government, it may be local government that ends up making the most important stimulus push of all.

Wages, Productivity and Inequality

I have mentioned previously in several posts the impressive success of the “Brazil Model” over the last decade. Under PT leadership, the country took advantage of a global commodity boom to build a middle class, increasing wages to reduce inequality. This fortified the country’s domestic consumption market, which in turn became a new growth engine for the national economy.

However, there is a very important downside to this development. Over the last decade, wage increases rapidly outpaced productivity gains, meaning that labor costs rose despite the fact that businesses were not increasing their output per worker. Wage growth is the key to reducing inequality, but without productivity gains such growth is unsustainable. Now that the commodity boom is over and Brazil’s economy is coming back down to Earth, the reality has become readily apparent. Growing wages in Brazil without massive investment in education, infrastructure and capital goods (such as machinery) have eroded the country’s competitiveness, and there is legitimate fear that recent gains in reducing inequality may be reversed in subsequent years.

Brazil’s situation stands in stark contrast to the U.S. and Germany, two manufacturing powerhouses that have seen wages stagnate over the last decade as productivity skyrocketed. Innovation, mechanization and globalization enabled businesses to reduce labor costs and increase their output per worker, while the purchasing power of the middle classes eroded and inequality crept upward. The result was therefore the opposite of what happened in Brazil: growing inequality helped businesses to maintain competitiveness in the global economy, and these countries now have some of the most dynamic manufacturing sectors in the world. But this led to other serious structural imbalances. In the U.S., the middle class turned increasingly to credit, which ended catastrophically in the collapse of the mortgage market in 2008. In Germany, growing export competitiveness combined with limited domestic demand led to unbalanced trade relations with Southern Europe, culminating in the ongoing Eurozone crisis.

The interplay between wages, productivity and inequality is therefore a fundamental challenge facing the world economy, and Brazil and the U.S. represent two opposite approaches that both have major shortcomings. In theory, wage increases should increase in tandem with productivity growth, but in practice this can be hard to achieve. In a society like Brazil with historically entrenched class divisions, reducing inequality is a top priority for policymakers and citizens alike and it is hard to argue from a moral perspective that the country should abandon this approach in order to maintain the international competitiveness of its businesses. Furthermore, the difficulty of unlocking productivity gains from within the middle-income trap means that Brazil would have few opportunities to build its middle class. In the U.S., unions have been the traditional guarantors of wage increases, but globalization has undermined their negotiating power as companies can simply choose to relocate to keep labor costs low. Policymakers have struggled to find an adequate alternative to guarantee that productivity gains “trickle down” to the rest of society.

What then, is the most appropriate approach to take on this issue? Are there moments when business competitiveness should be prioritized over inequality to create more wealth and innovation? And are there other moments where combating inequality should be the more central focus, especially in developing countries? It is difficult to come up with straightforward answers to this question, especially as the nature of the world economy rapidly changes due to globalization, digitization and automation. The growing role of additive manufacturing and internet services is causing such a paradigm shift that many now argue we are on the verge of a third industrial revolution that could completely transform society and upend our traditional models of economic development based on mass manufacturing systems. I have written before about how technological changes will force us to radically rethink our understanding of wages and productivity in the future. Looking at the difficulties currently faced by Brazil, the U.S., and Germany, a revolution in the nature of work may be the best chance these countries have of escaping their current paradoxes.